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What's Inside the Mind of the Markets?

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Earlier this week, I discussed how the rise of algorithmic trading has added to volatility and increased the level of skill required to trade the markets.

But aside from the increased technology used to price the markets and the speed at which prices sometimes change, there are two drivers that motivate the markets; and I'm not talking about fear and greed...

Living in a Subjective World

I was standing on the floor of the Chicago Mercantile Exchange last week when a young trader asked me why I loved this business so much. My reply threw him off a bit:

"I'm incalculably intrigued by the markets because there are no absolutes; and it's the only place you can be completely wrong and still make money."

The second part of the reply had little to do with my success, but more so with the failures of so many who have enabled me to profit. It's a horrible thing I know, but complete truth; and there are suckers playing this game every day (and yes I can be one at times).

The fact is that just about all of us have made dumb trades with no real basis other than our gut and made money. This "reward" for idiotic thinking often leads new traders down a path of destruction.

Our ego and confidence are often the reasons for our worst trades, but yet we need them to pull the trigger. Some of the best traders in the world are the cockiest men and women on the planet. The difference is that their confidence is often backed by objective data.

The value of a stock is purely subjective; susceptible to the ever-changing whims of man's sentiment, sometimes having NO relation to the company's health at all. The smartest traders have a basis for their trades and then a way of timing their trades when subjective value gets extremely disconnected from the objective.

What is Value?

Fundamentals are the core of what drives stock prices in the long term. Typically, you purchase companies with growth potential, good cash-flow, low debt and strong management, all of which are subjective and relative to others in their respective sector. Tools like the Zacks Rank help to target the best companies with the highest growth potential.

More . . .


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Stocks get their "fundamental checkup" four times a year during earnings season. It's at these moments where we get the facts and decide to continue holding or sell. In-between those reports, we may see news, analyst reports and other opinions. However, earnings are the end-all, be-all for the true financial health.

In-between earnings reports, stocks experience subjective manipulation, where stock prices sometimes make wild moves based on opinions of upcoming earnings or on technical formations, which I will discuss shortly.

The fact is that perceived value is determined every second of every day, and even the best companies can see their value drop for no OBJECTIVE reason. This is where the opportunity lies!

Finding Opportunity

There is a universally accepted gauge of determining a company's fiscal health. There are accounting standards and metrics that thousands of analysts use to compute a corporation's worth. This means that if you can target good companies through the use of the Zacks Rank or other methods, than you can minimize the fundamental risk and focus on mastering the technical aspect.

It's common practice to simply buy and hold a quality stock for a long period of time and endure the gyrations between the earnings reports. While the end result is usually positive, the volatility of the stock market can easily lead to a premature exit, stress or, worst of all, missed profit opportunity.

From time to time, great stocks with strong balance sheets and growth potential see their prices slashed. It's up to us to determine if that price cut is justified or just a great buying opportunity.

Exploiting technical formations can mean the difference between a good trade and an amazing trade. If used properly, you can dramatically increase your ROI and reduce your risk!


Assume you bought Priceline stock 6 months ago. It's a good company with strong growth prospects that has beaten the Zacks Consensus Estimate 4 times in a row.

Six months ago, shares were trading at $640; if you held them until today, you would have made almost 5%. But in the time it took you to make the 5%, the stock averaged a 16% monthly move up and down. The real question is whether your conviction or your stomach would tolerate those swings...

If you had a way to rationalize the volatility by layering on a couple technical indicators, you would not only see that most of the movement was "normal" for Priceline, but there were also eight [8] clear and unique signals to get in and out of the stock and take your 5% return and multiply it by a factor of 12!

No matter what you believe about technical analysis, it's important to realize that millions of traders believe in it. Whether it's simply a self fulfilling prophecy or something more powerful, you need to either learn it or employ a tool that alerts you to danger or opportunity.

Take a look at some of your favorite stocks over the past year or more, I bet there are times when you wish you could have bought more shares or times when you wish you would have sold.

The markets are getting faster, smarter and in many cases less predictable. You need all the edge you can get.

Easier Than You May Think

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Good Trading,


Jared Levy is a Zacks Rank Senior Equity Strategist with a broad international following and deep expertise in technical trading. He provides private recommendations and commentary for the new Zacks TAZR Trader.

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